How will Hunt’s tax plans impact Lloyds and NatWest?

The snakes-and-ladder performance of Lloyds and NatWest shares is continuing as speculation mounts over the chancellor’s tax-raising plans.

The UK’s economic turmoil meant more pain for investors today as potential tax and interest rate rises weighed on Lloyds Banking Group (LSE:LLOY), Marks & Spencer Group (LSE:MKS) and other popular stocks.

The internationally-focused FTSE 100 index weathered the storm by sticking close to its opening mark, but the FTSE 250 index shed 1% or 159.63 points to 17,369 as consumer-focused companies struggled in the wake of inflation hitting 10.1%. They face more pressure through higher business rates as the levy in England is based on September’s CPI rate. 

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The UK-specific factors ensured no follow through from Wall Street’s strong start to the week, which last night included encouraging subscription figures from streaming giant Netflix Inc (NASDAQ:NFLX).

The biggest faller in London’s top flight was Lloyds Banking Group after the Financial Times reported that Chancellor Jeremy Hunt is planning to target the banking and energy sectors for higher tax treatment as he looks to fill a £40 billion fiscal gap.

The current combined rate for the banking industry is 27%, which is made up of 19% in corporation tax and a surcharge for lenders of 8%. Monday’s confirmation that corporation tax is due to increase to 25% from April means this will become 33% without a reduction in the surcharge, denting the competitiveness of UK banks in the process.

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A Treasury review in October had planned to cut the surcharge to 3% to offset the corporation tax increase. However, the FT said Hunt is looking at a level of 5% in a move that could generate an additional £500 million a year for the government.

It comes with lenders poised to register higher profits through the impact of rising rates on their lending and the reserves held on deposit overnight with the Bank of England.

More details of Hunt’s plans are due on 31 October, a few days after Lloyds and NatWest Group (LSE:NWG) report their third-quarter results. The pair’s shares today fell 1.5p to 41.1p and 3.8p to 232.9p, extending the choppy trading since the mini-budget led to mortgage market turmoil.

The potential impact of the tax raid for UK lenders was highlighted by the performance of Asia-facing bank HSBC Holdings (LSE:HSBA), which led the FTSE 100 with a gain of 10.4p to 476.15p.

Hunt is also expected to extend the government’s windfall tax on oil and gas producers beyond its “sunset clause” in 2025 but this speculation failed to have much bearing on BP (LSE:BP.), Shell (LSE:SHEL) and Harbour Energy (LSE:HBR) in the top flight.

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Selling pressure instead focused on retailers including B&Q owner Kingfisher (LSE:KGF) and JD Sports Fashion (LSE:JD.) after today’s bigger-than-expected rise in the annual inflation rate.

The prospect this will lead to household spending power being further squeezed by sharply higher mortgage costs also contributed to shares in Marks & Spencer and Currys (LSE:CURY) dropping 1.3p to 102p and 2.4p to 62.95p respectively in the FTSE 250 index.

Other big second-tier fallers included the specialist lending and retail savings business OSB Group (LSE:OSB), which is better known as ONESAVINGS BANK (LSE:1SBB). Virgin Money UK (LSE:VMUK) also dropped 6p to 127.45p and price comparison site Moneysupermarket.com surrendered the big gains seen yesterday after better-than-expected third quarter results.

Among the few bright spots for UK investors, Royal Mail owner International Distributions Service rallied off recent lows with a gain of 5.55p to 202.2p while airline stocks easyJet (LSE:EZJ) and International Consolidated Airlines (LSE:IAG) were also in recovery mode.